Taxes

Effective Taxation Equity (Fairness)- Does everyone pay the same amount or percentage Simplicity- Tax laws should be easily understood Efficiency- Easy to administer and successful at generating revenue

Taxes are based on the following ideas: 1. The Benefit principle of Taxation- If you derive benefit from government should pay for it. 2. Ability to Pay- people should be taxed by their ability to pay.

TAX SYSTEMS PROGRESSIVE PROPORTIONAL REGRESSIVE

PROGRESSIVE TAX A TAX WHERE PERCENTAGE OF INCOME PAID IN TAX RISES AS THE LEVEL OF INCOME RISES (ROBIN HOOD) Federal Income Taxes

PROPORTIONAL TAX A TAX IN WHICH THE PERCENTAGE OF INCOME PAID IN TAX IS THE SAME REGARDLESS OF INCOME. (FLAT TAX)

REGRESSIVE TAX A TAX WHERE PERCENTAGE OF INCOME PAID IN TAX GOES DOWN AS INCOME RISES. (RICH PAY A LOWER %) State Sales Tax is an example

FEDERAL TAXES INCOME TAX FICA CORPORATE TAXES EXCISE TAXES (SIN TAXES) SOCIAL SECURITY 6.2 % OF WAGES UP TO $65,000, MEDICARE 1.4% OF WAGES CORPORATE TAXES (15% BELOW $50,000, 25% BELOW $75,000, 34% UNDER 18.3 MILLION, 35% OVER 18.3 MILLION) EXCISE TAXES (SIN TAXES)

State Spending 1. Intergovernmental expenditures- money from level of govt. to another ( sales taxes from state going to city govt. ) 2. Public Welfare – cash assistance, medical payments, and other welfare programs 3. Govt. Pensions and retirement funds

Government Expenditures (Spending)

Local Govt. Counties, towns, school districts, and other categories 1. Public Education, utilities, hospitals, police, fire, local roads

Balanced Budget An Annual budget in which the expenditures equal revenue

Debts, Surpluses, Deficits Deficit- spending in excess of revenue Current Deficit- 1.1 Trillion Federal Debt- the total amount borrowed from investors to finance govt. deficit spending. 3/5/2015 $

Sources of Debt 1. Govt. Trust Funds- special accounts to fund special spending (Social Security) 2. Current Spending 3. Interest payments on deficit spending.

Controlling the Debt 1. Gramm-Rudman-Hollings First attempt to mandate a balanced budget amendment, by making automatic cuts Failed- Congress could get around the legislation by delaying the spending, the economy started to decline.

Budget Enforcement Act of 1990 Pay as you go- an increase in one part of the budget will cause a decrease somewhere else. Only applies to discretionary spending, (spending the Congress has control over) Can be suspended if the economy slows

Omnibus Budget Reconciliation of 1993 Attempted to cut 500 billion from the deficit over 5 years. Intended to slow the growth of the deficit, not the deficit itself. Tax increases on the wealthiest 1.2 % of people

Balanced Budget Agreement of 1997 Congress gave the President – the line item veto (Supreme Court declared it unconstitutional) Rigid spending caps- legal limits on discretionary spending.

1998 Budget Surplus Strong Economy Control of Spending

2001 Recession slowed the economy 9/11 slowed the economy War in Iraq and Afghanistan started Growth of Entitlements- social programs to provide health, nutritional, or income supplements. (mandatory spending)

Tax Deductions Reduction of income that is able to be taxed Deductions include Child and Dependent Care High Education costs Mortgage interest Donations to Charities

Avoiding Taxes - Retirement Planning

Types of Plans A defined benefit plan, funded by the employer, promises you a specific monthly benefit at retirement. A defined contribution plan does not promise you a specific benefit amount at retirement. You and/or your employer contribute money to your individual account in the plan Federal law does not require employers to offer or to continue to offer a plan.

Several different options for retirement depending on types of employment 401K 403B (State Employees) IRA SEP-IRA Simple IRA KEOGH

401K For any type or size company. Funded by employee elective deferrals and optional employer matching. $15,500 in employee deferrals and up to $30,500 in optional matching funds;

403B/ 457 For any non-profit business, government entity, or educational institution. Funded by employee elective deferrals and optional employer matching. $15,500 in employee deferrals and up to $30,500 in optional matching funds "15-Year Rule":  employees with 15 years service can contribute an additional $15,000 over 5 years Fewer options than 401Ks

Simple 401K For businesses with 100 employees or less and no other retirement plan. $10,500 (total employee and employer contributions); Employer contributions 100% vested from day one

Solo 401K For self-employed, sole proprietors, partnerships, corporations. Covers owner and spouse only. Funded by salary and profit share $46,000

SEP-IRA For self-employed and small businesses under 25 employees $46,000 (based on years of service, performance, and employee salary).

Simple IRA (Employer Based) For small businesses with 100 employees or fewer. Funded by mandatory employer and optional employee contributions. $10,500 (matched or fixed contributions); Employer contributions 100% vested from day one. Can reduce contributions when business is not doing well.

KEOGH For law partnerships, medical practices, and family businesses with 10 or fewer highly paid employees. Funded by employee and employer contributions. $46,000 Defined contribution: Amount employees receive at retirement varies based on years of service, earnings, expenses, gains, and losses

Simple IRA (Employee Based) Can contribute up to $5,000 for the year Can take money out for qualified events without penalty. Taxed as ordinary income, which could be a tax rate as high as 35 percent, when you start taking distributions. Can start taking money out regularly at 59½.

ROTH- IRA Employee after taxes contribution 5,000 limit No tax deduction. Can take out the money you've contributed at any time without penalty. Money not taxed when you take it out at retirement. Can contribute past age 70½.